Interest rates held at 3.75% but Bank warns Iran war could mean future hike

Sarah Coles, head of personal finance at AJ Bell, said: “Don’t get comfortable. The Bank of England has held rates for the sixth consecutive month, but the markets are increasingly convinced that several rate rises could be in the pipeline. The MPC may have pressed pause on rates, but it’s expected to fast forward from here.

“Higher oil prices have inflicted an awful lot of damage, trading well over $100 a barrel again, and raising concerns that these higher prices will eventually feed into the cost of everything else. Inflation in August may have come in around expectations at 3.1 per cent, but the rise was driven by petrol prices, and we know this is just the first spending category to react when oil prices are higher. Over time, price rises are likely to get more painful and widespread.

“The Bank has chosen not to move today, partly because wage rises are still relatively modest. Workers are less likely to demand big pay hikes while they’re so nervous about the jobs market, so this won’t necessarily get baked into the economy through higher wages over time. Given that growth is still sluggish, the MPC doesn’t want to jump too soon and dampen potential growth prospects in the coming months, especially given how cautious consumers are and how reluctant businesses are to spend.

“However, the pressure is building. The market expects the first hike in November, a total of three by March and as many as five by July. The market has been wrong before – many times – so none of this is nailed on. However, it will already be having an impact on savings and mortgages.

“Mortgage misery is set to intensify. Fixed rates are set in the swaps market, which is driven by bond prices, which in turn move according to rate expectations. It means forecasts of more rate rises further down the line feeds into higher mortgage rates. As a result, we’ve seen major lenders hike rates yet again – for the second time in a month, and this may not be the last of it.

“If you have a remortgage on the horizon – within the next six months – it’s worth locking in a deal now. If rates rise as expected in the interim, you will have secured a relatively affordable mortgage, and if they don’t, you can shop around again closer to the time.

“Fixed savings rates owe an awful lot to future rate expectations, so they have continued to climb. They rarely shoot up overnight, because no bank wants to pay more than it has to, so the most competitive deals tend to nudge up over time. As a result, you can now make more than five per cent on savings fixed for two, three and five years, and five per cent on accounts fixed for a year. They could go even higher from here, but there are no guarantees, and anyone considering locking money away for a period has plenty of attractive options.

“But while hands-on savers could get a strong deal, anyone who tends to set and forget their savings could hit more problems, because higher inflation is more likely to eat away at their savings. For a saver with £20,000, the big six high street giants (HSBC, Barclays, Lloyds, NatWest, Santander and Nationwide) pay an average of 1.16 per cent on the branch-based easy-access accounts with no withdrawal restrictions. This is all clearly losing value after inflation. At times like this, it’s more important than ever to shop around for a decent savings rate, and consider cash hubs and online banks which tend to offer better deals.”